The Securities and Exchange Board of India (SEBI) has recently issued guidelines to prevent loan evergreening in Alternative Investment Funds (AIFs), addressing a key financial concern.
What is Loan Evergreening?
Loan evergreening is a practice where banks extend new loans to borrowers struggling to repay existing ones. This helps banks avoid classifying those loans as non-performing assets (NPAs).
How Does Evergreening Work?
Loan Restructuring: Banks modify repayment terms, interest rates, or loan tenures to delay recognizing a bad loan.
Round-Tripping of Funds: New loans are issued to repay old ones, masking the original debt issue.
Consequences
Evergreening hides the true financial health of banks, delaying the recognition of bad loans.
It can worsen asset quality, increase default risks, and distort financial indicators, ultimately leading to capital loss.
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